[ESTABLISHING A BUSINESS ENTITY IN ROMANIA] 395
debt costs incurred and the interest revenues and other assimilated revenues incurred by the limited liability company/branch. The excess debt costs are deductible within a threshold of EUR 1,000,000/year. The excess debt costs above this EUR 1,000,000 threshold may benefit from an extra deduction limited to 30% of the accounting profit adjusted downwards with the non-taxable revenues and upwards with the corporate income tax expenses, the excess debt costs and deductible tax depreciation. If the base computed as described above is zero or negative, the excess debt costs are non-deductible in the current period, but they can be carried forward for an unlimited period of time and they can be deducted in the next periods applying the same mechanism as described. 4.2 Transactions between related parties According to the current rules, large taxpayers carrying out intercompany transactions that exceed certain thresholds are required to prepare the transfer pricing file by the deadline for submitting the corporate income tax annual statement and to make it available to the tax authorities, within 10 days after a written request. Taxpayers not exceeding the abovementioned thresholds, as well as medium-sized and small taxpayers are also required to prepare transfer pricing files, but According to Romanian transfer pricing (TP) legislation, which mainly follows the OECD TP Guidelines, transactions carried out with related parties (including also Romanian related parties) shall reflect the arm’s length principle. Otherwise, if the tax authorities were to consider that intercompany transactions do not reflect the market prices, they would adjust the corporate income tax position of the taxpayer. The adjustment will lead to additional corporate income tax liabilities along with late payment interest and penalties (0.03% per day).
under less time pressure and only for tax audits. For them, TP files must be submitted within 30 days (the deadline may be extended up to 90 days) upon a written request from the authorities. Masterfiles drafted at the group level are not accepted and will not replace the local transfer pricing documentation. 4.3 Permanent establishment According to the Romanian Fiscal Code, a permanent establishment (PE) represents the “place through which the activity of a non - resident is carried out directly or through a dependent agent”. More specifically, a PE includes a place of management, branch, office, factory, shop, workshop, as well as a mine, oil or gas well, quarry or other place of extraction of natural resources. A permanent establishment includes also a building site or construction or installation project or any related supervisory activity only if it lasts more than six months. Double Tax Treaties may provide for different time rules for the creation of a permanent establishment. Since a PE means a taxable presence of a non- resident in Romania (i.e., with no legal presence), the PE shall register with the tax authorities as a corporate income tax taxpayer prior to engaging in income-generating activities. Alternatively, the PE could take the form of a branch, which needs to be registered with the Romanian Trade Registry. Repatriation of profits to the non-resident does not fall into the category of dividend payments and it is not subject to Romanian withholding tax. Permanent establishments are required to compute, declare and pay 16% corporate income tax. Depending on the tax avoidance method provided by the applicable double tax treaty, the profits earned in Romania will be either disregarded in the country of the “parent” company or the tax paid in Romania will be credited against the tax liability arising in that
ILN Corporate Group – Establishing a Business Entity Series
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